category: Accounting, Business
More and more we are hearing about tough economic times. The Baby Boomers are nearing retirement, leading to a change in spending habits and an economic contraction. As a result many businesses will suffer. However, amongst the doom and gloom, there is a bright spot in the business world. The family business. Many are thriving. Not only are they thriving, but they are growing too.
A McKinsey research report has found that family businesses are important in emerging markets, accounting for about 60% of private-sector companies with turnovers of $1 billion or more. 85% of businesses in South East Asia with turnovers over $1 billion are family run. Throughout the rest of the world, Walmart, Samsung, Porsche, Ford and BMW are all run by family dynasties with enormous power.
By 2025, McKinsey estimates that there will be more than 15,000 companies worldwide with at least $1 billion in annual revenues. 37% of those will be family firms.
So why, in an era overshadowed by the threat of economic downturn, are family businesses going to grow and prosper when, by all rights, they should be heading the same way as their corporate conglomerate friends?
Family businesses are all about securing succession, which means planning their business in the short term to reach long term goals. This involves navigating the ups and downs of the economy. The common owner manager structure allows family businesses to respond more efficiently to downturns rather than larger corporations requiring approval by a board of directors, allowing them more freedom of movement in decision making due to a shorter chain of command. Those family businesses who are not owner managed, have an increased ability to behave in this way due to the effective cooperation between managers and owners resulting from the strong culture of family business.
Apart from the business structure and chain of command, there is the environment in which they work. They are closer to their communities increasing their influence across the value chain, an aspect which is lost when it comes to larger, multinational corporations. Another aspect is the spending of money. Family businesses, unlike their corporate counterparts, are generally frugal in good times and bad. They keep the bar higher for capital expenditure and forgo excess returns available in good times in order to increase their odds of survival during bad times. They focus on resilience more than performance.
Despite these strengths, there are many challenges that small businesses face. Two major hurdles are the diversification of larger business models, leaving the family models unsuitable, and the second is succession. Though family businesses consider their succession path, only 13% survive to the next generation.
In summary, family owned and run businesses often survive bad economic times because of their structure, the environment in which they operate. However, they must plan for the long term and hurdle the many challenges family businesses face.
The family businesses that succeed will be the ones that put in place detailed plans and processes to handle succession transitions, while reconciling the family’s needs well in advance.
If you need help planning for your family business future, give Grange a call today.